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QUERY DESK

This is a limited access to the Query Desk, where we share some of the Queries we have answered. These are not recommendations, but a casual chat between a client and his advisor.

Client

21, Aug 18

Query

Subject: Mahindra holidays for long term

Hi ,

I have visited a couple of Mahindra holiday resort.

I was shocked to see that their resorts were fully occupied during weekday off season time.

Can you give your views on the financials and the valuations of the company .

Admin Reply

05, Sep 18

Hi Sir,

One of the top management person of Mahindra Holidays is our client (Recently left his Job), he told me that the product is just not sellable and great companies dont sell products, customers buy it. You open a D-Mart in any place and people would come, You launch a Godrej Properties project in any place and people will come but mahindra holidays is a difficult sell. 

 

He told me Mahindra Takes 6 lakhs upfront for 1 week of holiday Plus 14000 a year annual fees. The Problem is that Indian consumers are smart, they calculate the cost of capital with 12% interest rate i.e. 6 Lakh * 12%= 72,000 + 14000 as annual fees = 86000/Year. 

 

You can get most 5 stars in India for 7 days at less than 86000/year.. In a consumer product business, you need to have your consumers like you. 

Client

10, Aug 18

Query

Subject: Your video on edelweiss is very good

Dear Amit,

I am working for a one of the wealth management company (Your video of edelweiss got circulated in the entire company), i completed reading the entire question desk today and i am just amazed how much you know about so many stocks/Sector at this age. Hope you can keep enlightening the community with the same passion. I don't have a question today but delighted to be part of this community. 

 

 

Admin Reply

28, Aug 18

Hi Sir,

Thanks Much! You can share more about the wealth management Industry in the next query if your comfortable. I personally Believe wealth Management Industry is at a huge Tipping point, every business happens with these 3 things "Convince, Make the Sale and then Deliver better than expectations".

 

I believe Wealth Management as a industry now convinced people about Investing in Financials Assets, The Sale is happening and will grow, the delivery of Returns is the most important thing now. In Market More Money comes with More Returns at a Higher Valuation, the game is always the same. Good Luck !

Client

17, Jul 18

Query

Subject: Trying to understand Global Trends

Hi!

You've mentioned a couple of times that FAANG Stocks are the leaders of this bull market. There are a few data point that I would like to mention here and perhaps you could help all of us understand it better. -  Amazon, Microsoft, Netflix & Apple are responsible for more than 80% of the upside in S&P in 2018.  According to Bank of America - excluding just the five FAANG stocks, the S&P 500 return in H1 would have been -0.7%. 

16th July - Netflix reported earnings and they seem to have missed their earnings mark and cracked about 10% in pre-market session. You've mentioned Bull Markets are fueled by earnings growth. Do you think this might be the start of the end of the FAANG bull market? Also, in one of your answers you mentioned that US still is the most influential market - do you think that contagion effects would be felt in India as well severely. 

Also, I read in some cases that the Bond Market is able to give early signals about recessions. There are a couple of articles indicating that Bond Yields are inverting which signaling recessions. What are your views on the bond market and the inverting bond yields - do you think it might correlate to the bull market leaders missing their earning expectations (Netflix).

You have continously mentioned that India is on it's way to become a $5 trillion Economy by 2025(28).  You've mentioned that you're super bullish long term and a little bearish in the medium term (unclear due to political uncertainity in India). Do you think we could see a very significant crash in the next 3 years owing to global issues?

Apologies for such a long query but I hope I can get some perspective and learn from your ideas!

Thank you very much

 

 

Admin Reply

31, Jul 18

Hi Sir,

Thats a Complex Question to be honest because Netflix and Now even Facebook fell 20% 2-3 days back and even twitter on friday fell 20%. I am Tracking Facebook very closely and facebook after the Fall is exactly at the same level as it was in may2018. There was just too much extra euphoria which was built in. The Results were super for facebook but on concall the CFO said "expenses would rise going forward to due privacy and growth may slow a little". 

 

Facebook made a Panic Low and a double bottom at 150, i think markets would wait for next quarter before bidding facebook higher. The Range is now between 150-195 for it and a break in either direction would decide the trend. 

 

Indian Markets need a Leader to move up as the breakout has just happened. My bet is that with 46% revenue growth this quarter, the Leader can be Reliance Industries. There would be new Sector Trends that would be created, i believe it would be a B2C company probably but not very clear signs yet. 

 

World Recession i dont know or understand so much but you need to look at the FANGS, they will tell you where the S&P500 is heading. Google is making new highs, Amazon is Still making new Highs, apple also at new highs whereas Facebook is the same level as it was in May2018, Netflix was 200 at start of January 2018, even after the correction it is at 355, a 80% gain, not bad at all! 344 is a important support for Netflix, lets see!

Client

19, Jun 18

Query

Subject: Emerging Asia sees biggest foreign investor exodus since 2008

Dear Amit and team,

What is your opinion on this article.. Is it time to apply more adverse steps to reduce risks? Do you think until the next general elections, we should park the money oin a safer instrument like debt??

https://timesofindia.indiatimes.com/business/india-business/emerging-asia-sees-biggest-foreign-investor-exodus-since-2008/articleshow/64641715.cms

regards

Admin Reply

29, Jun 18

Hi Sir,

The Emerging Market Index (MSCI EEM) Gave a Breakdown 3 days back below 45$, i think  intermediate top is done there. Hangsang couldnt sustain above 32000 (2008 highs) and now breaking down. The MSCI EEM has to consolidate a lot before breaking out because i see serious drawdowns of 15-16% for global funds there. I think emerging markets are over-rated and i cant find one emerging market which is doing great things. 

 

See there will be new Trends starting, there will be growth, we will do well dont worry too much about emerging market trends. Every change creates an opportunity to make 3-10x gains, we are getting smarter and won't miss opporunities. Trends are more clear in a bear market, because the valuations are understandable and its very clear. 

 

Dont worry too much, the more market falls, the more times we will go higher. As on Today our Portfolio is down 8.5% YTD, i will get it back from them and a lot lot more believe me. There is nothing different in this fall, this will happen to us a lot of times in the 10-20 years but we need to focus on our strategy.

 

A lot of retail guys will be out of market and will promise never to invest again, Its always the same. In a journey toward wealth creation, we have entered a rough spot i.e. i call it a Jungle on the way. 

 

i remember what Ray Dalio the Largest Hedge Fund Manager says "In order to have a great life you have to cross a dangerous jungle. You can stay safe where you are and have an ordinary life, or you can risk crossing the jungle to have a terrific life. How would you approach that choice? Take a moment to think about it because it is the sort of choice that, in one form or another, we all have to make." 

Client

29, Apr 18

Query

Subject: How to Learn Valuation?

Dear Amit,

Thanks a ton for the Query desk as its a great learning tool and i am your lifetime member, but Whats is the Best Way to value a Stock?

 

Admin Reply

16, May 18

Hi Sir,

There are Different ways people Calculate value of a business, there is nothing perfect in the market and thats exactly what makes the market. With this Query i am going to give out my secret formula of valuing companies (giving it before as well). Believe me this is there is no books (at least what i have read)

The Most popular ways to calculate Value of Shares are

  1. Academic - Discounted Cash Flow
  2. Sell Side Analyst - Relative Valuation
  3. Technical Analyst - Chart Patterns and Momentum
  4. Accountants - Book Value
  5. My Secret Formula - (ROCE + Growth)/2 = PE Ratio

1) Academic - Discounted Cash Flow -

Meaning - Its the present value for all future cash flows. The discounting rate depends upon the riskiness of business. 
Problem - Needs prediction of Cash flows for next 10 years atleast which is impossible for 99.99% of Business’. I personally believe ‘Prediction is for Fools’ but i take this as a good starting point but don’t rely too much on it.

2) Sell Side Analyst - Relative Valuation

Meaning - How do you value a house? Majority of Houses are sold at the price depending on the price of the house in your Neighborhood. Relative valuation means looking at various ratio’s of Similar companies like PE, P/B, ROE, etc and coming to a valuation

Problem - No Two companies are the same. Both Page Industry (Jockey) and VIP Clothing are in the same industry of selling Undergarments. in last 7 years, Page industry has given its investors 42 Times returns whereas VIP Clothing has moved up only 3.2x.

3) Technical Analysis (Used by Majority of Traders, Academic hate them) - Meaning - He who believes that the market knows more than anyone else. Value of a share is the price at which it is being traded. The Price is because of Demand and Supply and nothing else.

Problem - You can’t use technical Analysis for very large money as you yourself are making the patterns.

4) Accountants - Book Value - Meaning - Value of the company =Assets minus Liabilities (Book value of Equity)

Problem - This is rarely true, as accounting doesn't happen at fair value rather than book value. The companies fair value can be and will be very different from its book value.

5) Stallion Asset’s Secret Formula - I am the Founder of Stallion Asset, we are a SEBI Registered (INH0000002582) Equity Advisory company and have delivered 306% returns in last 4 years to our clients. Please note, we use this formula extensively in our research, but do your due diligence before using this formula.

We are in the business of making money for our clients and creating alpha for them. The idea is bet on stocks that are mispriced, have High Return on Capital Employed and are expected to show above average Growth.

PE Ratio = Price/EPS

ROCE= Operating Profit/ Capital Employed

Growth = EPS Growth

The Stallion Secret Formula for Finding Fair PE Ratio is

(Sustainable 3 year growth + Expected ROCE)/2 = Fair PE Ratio

Example - If you buy a ABC company which is expected to grow at 20% for next 3 years and has a ROCE of 25% , then (20+25) Divide by 2 = 22.5 (Fair PE Ratio)

If you buy this stock at lets say 10 PE, i can virtually guarantee you that within 3 years if your thesis of growth is right, the stock will trade 22.5 PE so your gains are Valuation Expansion as well as Growth. So example you bought Stock ABC at 100, with an EPS of 10. In the next 3 years, if the company grows at 20%, then company will have an EPS Of 17.2 and with an estimated PE ratio of 22.5, the fair value of the stock would be 387 Per share.

Congratulations you have made you first 287% returns in 3 years.

Client

02, Apr 18

Query

Subject: What worked for stallion asset

Hi Amit

you are a young businessman, just like me (I am 36 years young) and a lot of people in bangalore are now speaking about you and luckily for you its all good things. In an older query you told there are 400+ advisors, what made people believe you and not others?

Admin Reply

12, Apr 18

Hi Sir,

The Difference is this ->

1) We never worked for money, we worked for creating a difference in life of Stallion Family

 

2) My competition sells Stock tips, we sell a investment strategy that has worked for decades successfully and consistently beaten the market. Most of the stallion family understands our strategy.

 

3) My Team has a lot of Energy and i believe you will see the same team in next 5 years (a lot more names but the current ones are core), every one here is running a marathon not a sprint. We think long term in our decision making process and give a lot of emphasis for greed for knowledge.

 

4) I only like business' where they create value for the customer (I keep saying in every 20th query that the customers love xyz company) and obviously i will do whatever it takes to create value for our customers, so they keep loving us. (Competative advantage).

 

We consider ourselfes very very small today and our goal of achieving financial freedom for majority of the stallion family is still far away.

Client

13, Mar 18

Query

Subject: Time is a great teacher

Hi Amit

Hats off to you and your team for hard work .In many querys you talk about Price Action, I don't know what is it and how to use it.Could you please let me know what is it and how to use it? Is there best book or site avilable to study it?

Regards

Admin Reply

23, Mar 18

Hi Sir,

Price action is basically what the screen is telling us. As you might know i have been a trader before i became an Investor. The Screen tells us about the sentiment of the Market and for now its extremely weak. The Fresh Breakdowns are telling me that we are entering a wave C of Correction Soon which is normally a difficult period. We are down 8-9% year to date on the Portfolio, wont be suprised if it goes to 15-18% at the Bottom.

 

I am Quite Confident on the Other side that this is a Bull Market Correction and those whose survive this can easily double their money in next 1.5-2 years!

Client

11, Mar 18

Query

Subject: Correction as Expected

Hi Amit,

I am very happy stallion member but i am sad that even though you have been very right (perfect analyst) on support of MSCI emerging market at 45 levels to intermediate top in nifty at 11,000 to calling small nifty rallies as sucker rallies and getting out of low quality, why didnt we take short positions? we could have achieved financial freedom in 2 months in this fall.

 

I am 45 years old and ready to make some risk in shorting stocks because whenever you sell, its the top of that stock and i have seen it in many companies, please have a product for people like us also where we can do only shorting. 

Admin Reply

23, Mar 18

Hi Sir,

You have to Fight some bad days to get the Best days of your life.  I dont think we have the capability to come up with more products ! HAHA.. We have given no Idea in Momentum product since last 2 months because we did strongly believe that the market would fall and are on 60% Cash there. I will only come out with an Idea where i have so much conviction that i can back it up with my personal money. 

 

This week i would like to Inform the Stallion Family that we have met/or would be meeting 23 Managements. Shorting is not very easy but there are 3 months in a year where you can make a lot of money. Remember Fear is a Much Stronger Emotion than Greed hence price rises are slow and Price Falls are fast. 

 

Wealth is created by Compounding at 30% CAGR but you need to stay the course of next 10 years. A Small Investment sum of 10 Lakhs Plus 40-50k Every month at 30% CAGR ends up becoming really large at end of 10 years. 

 

Dont worry, Match (Financial Freedom) toh hum Jeetegey i Just dont know if it will be in 45th Over or 49th Over!

Client

11, Mar 18

Query

Subject: Very good understanding of Price action

Hi Amit,

I have been in the Indian Market for last 20 years, but very few people understand price action and fundamentals both so well at the same time and can express. I am very impressed with your interview, you passion makes me very comfortable, keep going on. Your talks are very clear, it just shows your understanding on Markets.

 

I have shifted to the US 6 years back as i work for an IT company, and you have been bullish on FANG Stocks for last 1 year, any stocks you track here that i can invest in?

Admin Reply

23, Mar 18

Hi Sir,

Thank you for the Kind words. I only Track the Indexes well, and the leader of a Bull Market. Nasdaq made a New High and I believed that if it sustains above 7500 for 2-3 days it would go towards 8300. (Had Written it on Query Desk). Unfortunately the Nasdaq couldnt sustain, the Dow Made a Lower Low and the S&P 500 had a lower Low.

 

There is just too much Divergence to Understand now where the US Markets are going to go. This March could have been just a Pull Back rally and a correction may continue, but i am not so sure. The Chart Patterns in the US Market are not Very Clear to me now.

 

Facebook was down 7% and is at its major Support of 170, Lets see what Happens.

 

Money is made when you Invest at Start of the Trend, We are at the Start of the Road Construction Trend i think. Lets see what happens. 

Client

13, Feb 18

Query

Subject: Returns and themes..

If one has a goal of compounding at 18-20% CAGR while taking reasonably lower risks. Wouldnt it make sense to go in for mutual funds? or build out a portfolio with moated businesses? How would you go about achieving a goal of 18% CAGR for the next 30 years if you were to start today. It would be very interesting to know your views on this. As Im sure many stallion members would love to own those types of businesses that need relatively less tracking and tend to play into a blurry long term vision of the future. Typically high quality and proven businesses that go up atleast 5x in 10 years with a reasonable margin of safety. For eg. Indian consumer story so investors buy HUL, Dabur etc etc.. I understand that these businesses may not compound at 18-20%, just an example though. Another example would be pidilite at a 20-25x PE. 

Themes

I have told myself everyday that my plan for the next 10 years is buy all the AMC guys. HDFC, ICICI, UTI etc Unsure about reliance nippon, but if no one lists then I'm sure even stallion would have consider buying nippon. I would gladly allocate 30% of my portfolio into these guys and just let them be for 5-10 years. Since we dont know when they will list/if they will list as our bull market is slowly ending, how do we play this amc theme? Apart from buying the bank itself there really doesnt seem to be another way right? 

Organised RE

They arent RE cos. These are brands. They are essentailly cyclical consumer businesses. Keeping that in mind, those with the strongest brands will win large market share. Godrej have a pan india standardised business model as I understand but they are too expensive. How else can we play the upcoming housing bubble in India? We can buy "housing ancillary cos" as I like to call them, such as cera,the tile guys, home appliances. We can look at HFCs. But both these proxies are expensive as ever. What are the other ways that we can play this theme? 

Energy

As our country needs more energy what is our best bet to play this theme? Dscounting the commodity power companies is there another way to play this theme? One could say, more electricity=more lighting=people read more books? but thats a third derivative and that doesnt make too much sense. So without going too deep what is the ideal way to play this theme? I understand that this may not be the theme of today, but my logic behind "energy" as a theme revolves around the fact that, as EVs become a reality, the country will basically be substituting petrol/diesel with electricity. Since we dont have a clear play on EV, if we want to be early on this trend some sort of an energy play might give us an edge. "What refractories are to steel", What _____ is/are to electricity/energy". Something like that would present a nice opportunity.

Tourism

As Indian income increases, so will discretionary travel. We cant buy airlines. I will not buy a thomas cook type of business for obvious reasons (although thomas cook are doing work on slowly expanding into other areas). We could look at luggage cos. But apart from that is there any other way to play this?

Chai and coffee

This is obvious. If we can find a branded, integrated tea and coffee business it would be great. As Indian income increases and farmer income increases, number of cups of chai and coffee will go from 1-2 per day to 3-5 per day. That type of increase in consumption coupled with pricing power and visibiltiy would almost make the perfect investment opportuntiy. Alternatively we could look for proxies in this space. But that would most likely become a cyclical commodity business.Views?

Moated business

Business that dont grow topline too much but are able to grow their bottom line even at 10% a year signify a strong moat. Buying such businesses in a growing industry would result in super normal gains. 

Lastly If I was to put you on the spot and ask you for a 10 year 15-17% compounder with low downside and a 0.5%+ dividend what would your bet(s) be? 

Admin Reply

24, Feb 18

Hi Sir,

Lets understand Markets not from books that we read but real Markets. Majority of Mutual Funds Manager/ Portfolio Managers/ Advisory companies and probably someday me too will have to be always bullish on the Markets, speak long term but the truth is that there are two ways to make Alpha 

 

1) Asset Allocation 

2) Stock Picking

 

There is a bull Market happening in 1 Asset class atleast at all points of time since great recession of 1929., just to brief you about last 50 years.

 

1972-1980 - Commodity Rally and Gold Prices move up from 32$ to 800$. (In Eight years you made 25x)

 

1980-1999 -  Inflation tops out America (Bonds Rally), Dow Jones rallies from 800 in 1982 to about 11500 in 1999.

 

1998-2007 - Real Estate Prices in US, China and India rally 5-8x, it was a global trend towards real Estate.

 

2001-2011 - Gold Rallies from 300-400$/Ounce to 1920$/Ounce , a 5-6x gain in dollar terms. 

 

2009-2015 - Bonds yields in drop to Negative in European Nations, huge money printing and bond Investors made 3-10x depending on the Nation they bought. Bond Investors made a fortune in the US Market as well. 

 

2015 Onwards There has been a Global Equity Rally Led by US and technology Stocks.

 

Its not difficult to predict which asset class would do well, Smart investors can do it easily if you are willing to put in a lot of time and effort. There is always a bull Market in Atleast 1 Asset class. 

 

Point 2 - Stock Picking - I am not a believer of Buy and Hold Strategy because Moats will be broken faster than you think in next 5-10 years. Most Companies have distribution as a moat which has already been broken by technology. 

 

I believe there are trends in the Market, For example between 1989 to 1992 Cement Stocks like ACC and Ambuja Went up 70x, but only in 2006 (14 years later were those levels seen again).

 

HUL which is a super moat stock hit 300 levels in 2000 and used to trade there but consumers underperformed in the 2003-2007 bull market, the only time you saw HUL Back to 300 was in 2011. (11 Years Later)

 

Markets are a discounting Machine, they will discount 5-10 years of predictable growth today in a bull Market. The More the visibility of Growth Increases the more markets are ready to pay for it. Consumer companies in India trade at 50-60x, whereas a Nestle in Swiss trades at 16x, Unilver plc trades at 20x, Nestle in Malaysia normally traded at 20-25x, because investors are ready to pay for consistenty of growth. Isnt it stupid by showing 10 Crores of Extra-profit a consumer company gets 500-600 Crores of extra market cap?

 

Nifty is a Freefloat weighted Index, i.e. it would invest more in Reliance only because the price went higher and less in SunPharma only because the Price went lower. Every Industry is different, for Example whereever there is new big competition coming, believe me that industry is 1-2 years from the Top.

 

For Example In 2003 - There were 3 Players in Telecom i.e. Bharti, Vodafone and Idea. By 2009 it became a 16 player market and most stocks topped out. Today again telecom has become a 3 player market. 

 

This is now happening in the Financials space where from 5-6 important private banks, there are new Small Finance Banks, There are NBFC's and then there are New Private Equity funded Digital banks . The competition is increasing in the lending space and remember money is a commodity. In a Normalized Scenario this would have been a top for financials but since most PSU banks are not able to lend and there are major governance issues the Top would be 1-3 years away. Believe ME - 2020-2030 the biggest underperformers will be financials, because there would be huge huge huge competition and you would see a credit bubble in India but till that time hold on to your horses. 


 

The Point i am trying to make is the Competition destroys profits, and technology is destroying Moats. There is no thing a 10-20 year Stocks in my books, I would just end up saying - Stock market is Wife, Stocks are Girlfriends.

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